By Amy Leisinger, J.D.
The SEC’s Investor Advisory Committee heard from panelists on current trends surrounding capital formation and smaller companies as well as the recent decrease in the total number of initial public offerings. Costs play a role in deciding whether to go public, the panelists noted, but the changing landscape may likely be attributable to the broader availability of options for private offerings. Regulations should incentivize companies to make the right decisions in light of their particularized circumstances, they noted.
Jeffrey Solomon, President of Cowen Inc. and CEO of Cowen and Company, noted that the cost of operating small funds is quite large in proportion to potential growth and that, ultimately, investors are disadvantaged by cost constraints. Moreover, he explained, the myriad costs inherent in being public play a role in deciding on a corporate approach, and the answer may be to relax requirements in order to incentivize small funds. The decline in small cap IPOs is the result of many factors, he said, including brokerage firms’ migration to asset allocation from individual stock recommendations. In addition, Solomon noted the rise in the number of passive investment vehicles that do not participate in capital formation and potential returns on small IPOs not significant enough to encourage large investors to allocate resources away from secondary market. Regulators and industry participant should continue to consider means by which to make the market structure more conducive for small caps, and this may include extending the Tick Size Pilot Program, he stated.
Duke Law School Associate Professor Elisabeth de Fontenay agreed that the cost of regulation story remains the dominant narrative, particularly in light of JOBS Act and related regulatory changes designed to ease the burdens involved in raising capital as a private company. Public companies used to see a benefit to substantial disclosure burdens—the right to publicly raise capital—but now, much more capital is going into private companies, she noted. Moreover, de Fontenay continued, private companies are likely directly benefitting from the disclosures set forth by public companies. To increase IPOs and exchange listings, the SEC may need to re-regulate private offerings or level the playing field to ease the burdens of public-company status, she opined.
Andreesen Horowitz Managing Partner Scott Kupor noted that IPOs are currently going at a much higher value than in the past and suggested that “it just does not pay” to be a small cap company. The key is bringing back support for the small cap market and conducting a comprehensive review of the costs and tradeoffs involved in going public, he said. While the SEC focuses on its mission to facilitate capital formation and ensure investor protection, the agency cannot forget the maintenance of fair and efficient markets. The integrity of the markets is crucial for the protection of investors, and regulators must look at pricing in the market, disclosure obligations, and growth opportunities and limitations when considering regulation of public companies. This may require efforts to shift the perception of the value of going public and taking steps to regulate in a way that encourages and rewards doing the right thing, Kupor concluded.